MONTE-CARLO SIMULATION CALCULATION OF VAR (VALUE-AT-RISK) & CVAR (CONDITIONAL VALUE-AT-RISK)

Transcription

1 MONTE-CARLO SIMULATION CALCULATION OF VAR (VALUE-AT-RISK) & CVAR (CONDITIONAL VALUE-AT-RISK) PRESENTER: SANJOY ROY 15-APR-2018

2 TERMINOLOGY V-a-R (Value-At-Risk) How much can one expect to lose Parameters defining VaR Portfolio, Time Period and p-value. A VaR of 1 million dollars with a 5% p-value and two weeks implies that the portfolio stands only a 5% chance of losing more than 1 million dollars over two weeks C-VaR (conditional-v-a-r) aka Expected Shortfall: same three parameters as a VaR statistic, but considers the expected loss instead of the cut-off value. A CVaR of 5 million dollars with a 5% p-value and two weeks indicates the belief that the average loss in the worst 5% of outcomes is 5 million dollars. A portfolio is a bunch of instruments which we are trying interested to gauge the V-a-R or expected loss. Market factors are the key-indices which are considered as imaginary super-set of instruments traded in a particular market/bourse eg, S&P500, US Treasury, Return change in an instrument or portfolio s value over a time period.

3 RESULTS PDF OF INDEXES USED

4 RESULTS THE SIMULATED RETURN OF PORTFOLIO

5 SUMMARY OF RESULTS

6 EXTENDED RESULTS AS A WEBLOG

7 D3 VISUALISATIONS ILLUSTRATING TRENDS

8 ARCHITECTURE

9 ASSUMPTIONS All financial data for instruments and market factors are extracted from YAHOO! Finance. The window of return is stipulated to 2-weeks for both instruments and factors, and the p-value is set to 5%. We are interested in the daily closing value of an instrument/index (factor) We will be using OLS (Ordinary Least Squares) Regression algorithm to model the relationship between market conditions (factors) and each instrument s returns. We will employ Multi-Variate Normal distribution to simulate the trial data. We will be using breeze library for plotting the probability density functions For a given distribution, we will choose a sample from the distribution, derive the standard deviation of the sample, and use Gaussian kernel on the sample (with the std-dev) to derive the probability density of the sample. The trials will be split into specific number of threads (which is parameterized) to be executed in parallel. For every trial, we will deploy Mersenne-Twister algorithm to generate a random number which will eventually help to build the simulated data for values of an instrument in each trial.

10 MONTE-CARLO SIMULATIONS OVERVIEW Step 1: We will model the relationship between market conditions (factors) and each instrument s returns. Using vector algebra, we will generalize the total return of an entire portfolio. Employ OLS (Ordinary Least Squares) Regression algorithm with polynomial features. Output of the model is the coefficients/weightage vector Step 2: Choosing a distribution function (MVND) with the parameters of the weightage vector - covariance (cov) and means (m) and a random number, or, MVND = f(random number, cov,m) Step 3: Generate the trial data based on for parameterized number of trials, and in how many parallel threads we want to generate the workload. For every iteration in the trial the MVND = f(random number, cov,m) function provides a simulated distribution of instrument prices. Each vector of simulated distribution of instrument return is applied the weightage vector to provide the instrument return (as mandated by the model in Step 1). All such instrument returns constitutes the simulated vector of returns of a portfolio.

11 MONTE-CARLO SIMULATIONS OVERVIEW Step 04: Calculate the Risk Measures from the simulated returns V-a-R (at p-value) which essentially means pick the return, from the simulated return vector generated by the MC Trial, which is in the bottom p% of the distribution. C-V-a-R (at p-value) calculate the average return of the bottom p% of the distribution Step 05: Evaluating the results Boot-Strapping the confidence interval Back-testing on historical data

12 DATA FLOW HOW WE ARE DOING IT Provisions made to run the monte-carlo simulation to calculate the V-a-R and C-V-a-R for a particular stock (which can be parameterized) or an entire set of portfolio. Extract publicly traded instrument and indices from YAHOO! finance Stage the instruments in an HDFS directory which indicates a portfolio. Stage the factors in another HDFS directory which indicates the factor. Filter the portfolio of instruments and the indices on the same time-window of 2-weeks to generate the instrument-return and factor matrix. Model the relationship between market conditions (factors) and each instrument s returns to derive the weightage vector. Hitherto everything is being setup using normal scala collection in a single thread to ensure the integrity of the data specially applicable for the linear algebra operations underneath the OLS Regression algorithm. Apply Apache Spark s distributed framework to split up the trials in threads and execute the threads in parallel: (partitioning-by-trial). In each thread - Use the parameters of the weightage vector (covariance and means) to generate simulated return of vectors for each instrument. Additional parallelism can be achieved by executing the trials for individual stocks in parallel.

13 PROCESSING PARALLEL WORKLOADS METHOD 1 Executing n trials with 3 threads Portfolio Thread 1: running n/3 trials Factors Thread 2: running n/3 trials Thread 1: running n/3 trials Simulated Trials Input Data

14 PROCESSING PARALLEL WORKLOADS METHOD 2 Executing n trials in 3M threads Portfolio of M instruments Stock 1 Thread 1: running n/3 trials for stock 1 Thread 2: running n/3 trials for stock 1 Thread 3: running n/3 trials for stock 1 Factors Stock 2 Stock M Thread 1: running n/3 trials for stock 2 Thread 2: running n/3 trials for stock 2 Thread 3: running n/3 trials for stock Thread 1: running n/3 trials for stock 2 Thread 2: running n/3 trials for stock 2 Thread 3: running n/3 trials for stock 2 Simulated Trials Input Data

15 WHERE TO GO FROM HERE Parameterizing the OLS Regression with further regularization parameters Option to choose a different regression model like Decision Tree. Enable SQL on Big Data Make Spark SQL Framework function via HiveContext and process data from HDFS via Hive Metastore Extend the algorithm so that it can be leveraged for online scoring as well. Read/Write the data in HDFS in binary(efficient) file formats, and use AVRO serialization/deserialization techniques to read/write the data Store data in ORC format to query in HIVE Store data in PARQUET format to query from HBASE Data Visualizations Intuitive Dashboards on streaming data

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